EF (10) — Freedom and Misconceptions of Money — Quotes and Links on Say's Law and Money Neutrality

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Being rather more like a personal note for future reference, this post is not really a statement addressed to my readership; however, I am happy to share my groping efforts with anyone who may take an interest in my attempts at writing the third part - the one concerned with economics - of my book (i.e. long series of posts) on liberty.

In the prior two parts on The State and Politics I have shown that modern societies with a high degree of liberty depend — no less than earlier and more rudimentary societies with considerably lesser room for freedom — on organised enforcing capabilities, that is: controlled violence, power, and dominance, whose evolutionary terminal is the state, the most effective structure of maximal power in an enduringly viable community. Intertwined with The State is Politics, another anthropologically ubiquituous means to organise society through (inevitable but also often dispensable) repression and command. 

In a free society, Politics — like The State — serves to refine the means and quality of enforced confinement to which all members of society are subjected. Thus, non-violent games (of political competiton like electoral processes) may take the place of lethal battles, and losing parties may be accorded a status of respect and comfort, and be granted an irrevocable right to challenge the victorious order in future rounds of contestation. 

Politics and the State need to be comprehended in these capacities — and in their indispensability in a regime of liberty — if one wishes to get a grasp of the role of The Economy in a free society. 

The Economy is based on governmental actions and determinations and the political processes that drive the former. The Economy is neither an entity distinct from Politics and the State nor an alternative to a world where economic life is permeated by Politics and the State.

From my conception of liberty it follows therefore that theories of the economy that ignore, deny or trivialise the political and state-dependent nature of economic activity misrepresent the conditions of freedom.

I find MMT to offer a theory of The Economy that is congenial to my view of liberty according to which The Economy is a highly and inescapably political arena.

In tune with this post where I highlight the insight that

... the root problem of economics is the total confusion of anyone and everyone on what money is ...

I hope to show — as a preludium to my presentation of MMT — that in classical and neoclassical economics the desire to represent the overall economy as a system of benign equilibrium has led their adepts to leave out important aspects of The Economy (of a free society), in particular money, and that this omission has corrupted the subject matter both in terms of scientific integrity and in terms of its suitability for political advice.

The below quotes and links add to a growing bibliography from which I hope to draw a consistent account of how preconceptions in favour of a naturally equilibrating economy have prevented economics to adequately incorporate money into its reasoning and thereby committed itself to erroneous and irresponsible narratives of The Economy.

Ironically, the initial impulse to advertise the power of (relatively) free markets has enticed its advocats to ignore fundamental preconditions and implications of an economy operating under a regime of unprecedented liberty.

Free markets, in order to be as free as they possibly can and ought to be, require considerable and constant governmental and political intervention. Hence, the question is not whether markets must be free of governmental/political intervention or not—much rather, the pertinent issue relates to the kind and quality of such interventions.   

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Mitchell in There is no unemployment in a non-monetary economy on Ricardo's Corn Model (Februrary 21, 2012):

This model was used to show how the rate of profit was determined by production (not exchange) and also was used to deny the possibility of generalised over-production.

This follows from the following logic. Total output (in units of corn) can be consumed (C) or saved (S). Any corn saved is automatically re-planted (which is considered to be investment (I)) so by definition C + I = C + S and so S = I. What is not consumed each year automatically becomes investment and the only question of interest is the composition between C and I. This was a simplistic version of Say’s Law.

Also contains interesting quotes from Paul Davidson and an explanation of how State Money is the prerequisite for unemployment.

Mitchell in The natural rate of interest is zero on Say's and Walras' Law (August 30, 2009):

Accordingly, you have to consider markets equilibrate through price adjustments and the economy tends to full employment (meaning there cannot be a deficiency of aggregate demand). So if consumption falls (because saving rises), the interest rate (in the loanable funds market) falls (excess supply of loans) and investment rises to fill the gap left by the fall in consumption. This is Say’s Law which is restated as Walras’ Law when multiple markets are introduced.

So the interest rate adjusts to the natural interest rate where the full-employment level of savings equals investment and all is well. There is never a shortage of investment projects but their introduction is impacted upon by the cost of funds. There is never unemployment!